With an eye on supporting growth and innovation in the UK asset management sector, the government and FCA are proposing changes to the UK’s alternative investment fund manager rules. The proposals would allow for a more proportionate approach to regulation while balancing the need to protect investors and the market, and are outlined in a HM Treasury consultation paper and FCA call for input. Both papers were published on 7 April 2025, and are open for comment until 9 June 2025.
The legislative architecture
The UK’s rules are derived from the EU Directive on Alternative Investment Fund Managers (“AIFMD”), which was implemented via a combination of Treasury regulations and FCA rules (collectively, “UK AIFMD”). Following the UK’s exit from the EU, UK AIFMD has largely remained unaltered from a policy perspective, whereas the EU has continued to amend and evolve its approach, most recently with the publication in the Official Journal of an amending Directive known as AIFMD II, due to take effect in member states’ national laws in 2026 (our note on those changes is available here).
The UK is not contemplating rewriting UK AIFMD entirely, with the government noting that “[m]any aspects of AIFMD are necessary to formalise a global consensus, provide investor protections and mitigate against some of the financial stability risks which [alternative investment funds (“AIFs”)] can pose”. However, the government and the FCA see an opportunity to review and streamline the regime to ensure it works well for alternative investment fund managers (“AIFMs”) operating and marketing in the UK, recognising that some aspects of the regime are not necessarily proportionate to the risks in different parts of the sector and for firms of different sizes.
In line with the UK’s approach to other EU-derived financial services legislation, proposals for UK AIFMD would see greater consolidation of the rules in the FCA’s rulebook, with legislative measures providing an overarching framework.
There is not a huge amount of detail in the proposals at this stage, which is by design given that the FCA is gathering views in a call for input rather than fully consulting, and most of the detailed rules will eventually be found in the FCA rulebook. The proposals themselves focus on establishing the perimeter of regulation, with both Treasury and the FCA acknowledging that there are further aspects of the legislative framework, and further detail on these proposals, that will need consultation.
AIFM categorisation
The main proposal outlined in the government consultation and elaborated upon by the FCA call for input is to recategorise UK AIFMs into three tiers, which would replace the current framework of Full-Scope AIFM, Small Authorised AIFM and Small Registered AIFM categories.
All UK AIFMs would be subject to differing (“proportionate and appropriate”) levels of FCA authorisation, but there would be no category of firm which is only “registered”. The intention behind this is to ensure that there is no “cliff edge” in the thresholds between firms, which has been identified as a shortcoming of the current regime, and to mitigate against the “halo effect” as FCA registration implies a degree of oversight by the FCA, which in fact has limited powers over firms within the regime.
Thresholds for categorisation of AIFMs would be determined based on NAV, rather than on leveraged AuM as is currently the case. The call for input describes this as “an AIFM’s assets minus its liabilities”, and we presume this means the aggregate NAV of the AIFs that the AIFM manages. Specifically, the FCA envisages:
Large firms (over £5bn NAV): would be subject to a regime similar to the current rules for Full-Scope UK AIFMs. However, even for these firms, the FCA may disapply some burdensome rules from all firms within this category, and certain rules for firms carrying out specific activities. In some areas, for example on disclosure and reporting to investors, the FCA will remove some detail where prescription is not necessary to achieve the intended outcome.
Mid-tier firms (between £100m and £5bn NAV): would be subject to a comprehensive regulatory regime, covering all the same areas as the current regime, but without many of the more detailed procedural requirements (such as some of those in current onshored Level 2 regulations), to allow for greater flexibility.
Small firms (under £100m NAV): would be subject to core baseline standards, essential for maintaining appropriate levels of consumer protection and market integrity.
Firms would not need to apply for a variation of permission as they change size category, but the FCA could require firms to notify it of their size category, including whether they choose to opt-up to a higher category.
The government identifies three types of AIFMs which are currently within the Small Registered regime, and proposes to:
retain the existing rules for the regulation of managers of Social Entrepreneurship Funds and Registered Venture Capital Funds and consider their regulation in full as a separate workstream;
require managers of sub-threshold Unauthorised Property Collective Investment Schemes to seek FCA authorisation, as managers of AIFs; and
consider requiring the managers of sub-threshold Internally Managed Companies to seek FCA authorisation, as managers of AIFs.
The government recognises that market participants have raised several challenges with the application of UK AIFMD to Listed Closed-Ended Investment Companies in particular, however it nevertheless considers that they should remain within scope of UK AIFMD, but with the FCA proposing to remove certain duplicative requirements in relation to their management.
The FCA call for input highlights that it will be important the rules can be flexed when applied to firms undertaking different activities, noting, for example, that that some of the existing rules are not always suitable for managers of funds focused on less liquid investment types, such as private equity and real estate. Some examples are given of how the rules might apply to those firms, particularly around risk management.
Leverage
Despite changing its metric from leveraged AuM to NAV, the FCA notes the importance of measuring, monitoring and managing the risks of high leverage in AIFs. The FCA plans to evaluate the adequacy and effectiveness of current UK AIFMD provisions in addressing risks from leverage in line with the FSB consultation on leverage in non-bank financial intermediation, and is also considering if it needs to be clearer about expectations of risk management by highly leveraged firms.
Depositaries
The FCA sees no immediate need to make radical changes to how asset safekeeping and fund oversight should be carried out for large and mid-size AIFMs. They nevertheless welcome input from stakeholders on whether the FCA should explore proportionate alternatives that meet global regulatory standards. However, for Small Authorised AIFMs and those Full-Scope AIFMs that manage overseas AIFs not marketed in the UK which are not required to appoint a depositary, the FCA notes it does not propose to make them do so in future, albeit noting the current CASS safekeeping regime will continue to apply to small firms.
Additional proposals
The government intends to legislate on the following areas as part of the new regulatory framework for AIFMs:
Definitions: The government proposes to streamline some of the definitions that underpin the regulated activity of managing an AIF so that they are in one place, but doesn’t intend to make substantive changes.
The AIFM business restriction: Some firms have raised concerns that restrictions which prevent AIFMs from conducting non-AIFM activities from within the same legal entity add unnecessary costs and inefficiencies. The government and the FCA will consider this.
NPPR: As market participants have not raised concerns with the operation of the National Private Placement Regime, the government proposes to broadly restate the marketing regime for overseas AIFMs in legislation. Any technical changes will be subject to consultation when the draft legislation is published.
UK AIFM marketing notifications: Because AIFs are marketed predominantly to professional investors, the government sees no need for AIFMs to notify the FCA 20 working days prior to marketing.
Private equity (control) notifications: The government is considering whether to remove the requirement for firms to submit these types of notifications to the FCA, or whether this information should be notified elsewhere, given that in practice this activity is not wholly relevant to the FCA’s statutory objectives.
External valuation: Concerns have been raised about the liability standard, and the government is considering whether growth in the market for external valuation services would be facilitated by removing the legal liability of the external valuer concept from legislation. In this scenario, the external valuer would have contractual liability to the AIFM, and the AIFM would still have legal liability to the AIF and its investors.
The FCA flags that its call for input focuses on issues related to the regime for managers of unauthorised AIFs. It does not address at length other issues it is considering (some of which overlap with the above), including:
simplifying the requirements for managers of authorised AIFs into a single set of rules;
prudential rules for AIFMs;
regulatory reporting under UK AIFMD;
requirements for AIFMs around disclosure, distribution and marketing to retail investors;
remuneration requirements for AIFMs; and
the AIFM business restriction.
Timing and next steps
Both papers close for comments on 9 June 2025. Depending on the outcomes from the consultation, the government will publish a draft statutory instrument for feedback. Subject to feedback, and to decisions by the Treasury on the future regime, the FCA plans to consult on detailed rules in the first half of 2026, and will also provide more details on the timeline for implementation.
Contacts
If you would like to discuss anything in this note, or investment funds or financial regulation more generally, please contact your usual Linklaters LLP contact(s) or the contacts on this page.
For further information, please contact:
Rahul Manvatkar, Partner, Linklaters
rahul.manvatkar@linklaters.com
